India's InCred Asset Management makes first close of maiden debt fund at nearly $37m

India's InCred Asset Management makes first close of maiden debt fund at nearly $37m

At a time when investors have tightened their purse strings in doling out fresh equity capital, InCred Asset Management has announced the first close of its debut credit fund at $36.7 million to tap companies looking for growth capital to spur expansion plans.

The total corpus that the firm is targeting to raise is Rs 500 crore ($61.2 million) with a green-shoe option of another Rs 500 crore. InCred Credit Opportunities Fund I is expected to be closed by the end of next year.

“India is currently at a juncture where many exciting businesses are getting created almost daily,” Saurabh Jhalaria, CIO, Alternative Credit Strategies, at InCred Asset Management, told DealStreetAsia in an interview.

InCred has roped in family offices as well as high-net-worth individuals for its maiden fund and is expected to make 20-25 investments over the next few years through the debt vehicle. At the group level, the firm, however, also manages a category III Alternative Investment Fund that invests in midcap and smallcap stocks.

Through the debt fund, InCred is betting big on cleantech, B2B platform, EV, SaaS, and D2C brands. “These businesses are witnessing a significant growth curve, and we feel that venture debt has a big role to play in these sectors,” said Jhalaria.

Edited excerpts:

The venture debt market in India is getting bigger, and there are plenty of players coming forward to tap it. Tell us about the opportunities you see today.

India is currently at a juncture where many exciting businesses are getting created almost daily. These new businesses are not only offering new products and services but, in many cases, even giving established businesses healthy competition by disrupting old ways of doing such business.

Macro trends like increased use of tech in everyday life, the government’s thrust towards digitisation, favourable demographics, and availability of risk capital for business ideas are causing such an explosion in emerging corporates.

A lot of these new-age businesses have proven their business models and have reached a sizeable scale. At that stage, businesses usually get acceptability in the credit markets, and founders no longer have to continue to raise equity to fund the business growth.

We see a big opportunity in those companies. Top lines are growing; these businesses are showing a strong path to profitability and need growth capital as well as working capital to finance growth. In such situations, venture debt is the most logical type of capital for the business.

From the sectoral standpoint, we see a lot of exciting companies getting created in cleantech, B2B platforms, EVs, SaaS, and D2C brands. These businesses are witnessing a significant growth curve, and we feel that venture debt has a big role to play in these sectors.

Do you think this is the right time to launch a debt fund given the volatility in equity markets and a slowdown in equity fundraising over the past few months?

This is probably among the best vintages to invest in credit markets in India. Volatility in equity markets, together with a high-interest rate environment, bodes well for high-yield debt investors looking to lock yields for short to medium duration.

The type of companies our fund is focusing on — emerging corporates who have achieved scale and have a strong path to profitability — are not as reliant on incremental equity.

Our proposition to such corporates is that when the balance sheet has a working capital gap, it should be financed through debt and not equity. The companies should continue growing their business through non-dilutive debt capital, which our fund aims to provide.

Volatility in secondary equity markets and the funding winter in private markets are making our fund proposition with the founders and VC shareholders a lot more relevant.

What is your view on the current slowdown? While India is still better off, it can’t be totally isolated from what’s happening across the globe. What are your views on the valuations that companies are now quoting?

No question that valuations in the Indian startup ecosystem will also be impacted. But our view is that valuation correction has not impacted the availability of equity capital for Indian companies.

Exciting business ideas are still attracting lots of venture capital. However, we see some corrections in late-stage and very large private companies.

We are also seeing increased usage of convertible structures in funding nowadays. The structure allows the buyer and seller of equity to have differences in view on equity valuation but still be able to transact, and we expect this trend to continue.

However, our fund does not focus on such large private companies.

Take us through InCred Asset Management’s credit fund. How difficult was it to raise capital in the current economic environment? Could you throw some light on the investors/LPs?

We believe that the risk appetite of Indian investors towards these new-age businesses has increased substantially in the last few years. The investors very well understand the macro trends and investment arguments for such companies while being conscious of the risks involved. Some investors already have exposure by investing in the venture ecosystem via funds or via their own angel networks.

So, the conversation around providing debt to such companies as they scale up was quite easy and logical. This is reflected in the strong and swift response that we got in our first close within three months of launching the fund.   

What are the kind of returns that you are looking at?

We like to remain granular in our investments and like to invest 4-5% of the fund size in individual portfolio companies. This allows us to diversify the portfolio both in terms of sector exposure as well as individual companies across a gamut of sectors that I mentioned earlier.

At a portfolio level, we are targeting a gross IRR of over 17% purely from contractual interest income.

How do you plan to differentiate yourself from firms such as Alteria Capital, Trifecta Ventures, Stride Ventures, and Innoven that are already in the market?

Quite frankly, each one of us has a role to play in widening this ecosystem. We think the funds mentioned will generate their expected returns for their investors while supporting the venture ecosystem.

We like to focus on businesses which are proven, have achieved scale, and are looking to fund the working capital on the balance sheet. We like to assist those businesses in asset creation (working capital or fixed assets).

In such businesses, we like to be a non-dilutive capital provider, and hence, we don’t typically take warrants or any kind of equity upside. This way, founders and VC shareholders know that they are dealing with a pure non-dilutive capital provider.

We also have a shorter fund life as we do not have to wait for the warrant upside to generate the expected returns.

How do you plan to deal with the risks associated with bad loans? We have already seen a crisis in the NBFC space. What are the ways to avert a similar situation in the private credit space?

The NBFC crisis was largely a liquidity crisis in our view. Typically, that happens when you are running an ALM (asset/liability management) risk; long-term assets funded by short-term liabilities. In our case, that is not the case; we are structured in the form of a Category II fund, which is a close-ended fund, and lock-in capital, which in turn is invested into NCDs of shorter duration.

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